Abacus: Buying a Home During a Pandemic
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For many millennials, buying a home can be an exciting, albeit rather demanding, goal. A number of challenges that arise, such as stabilizing a high credit score and saving up a sizable down payment, can make it difficult for many young people to achieve such a feat, especially for those residing in high cost of living areas.
Nevertheless, given that such issues persist during times of normal economic growth, an aspiring homeowner should become even more cautious during periods of high uncertainty, such as the one currently faced by many buyers in the aftermath of the peak of the COVID-19 pandemic in the United States.
The question as to whether to purchase a home during a pandemic is not a simple one and, as, during any time, the decision typically varies from person to person. However, there are some unique aspects of the economy in its current state that hopeful homeowners could take advantage of, one of which pertains to the interest rate.
The interest rate is one of the most important features of a mortgage that homeowners try to minimize as much as possible. The theory goes that, the lower the interest rate, the fewer homeowners owe on the principal loan to their creditor, which is usually a bank.
Given the United States’ recent recession in February, the Federal Reserve lowered rates to historically low levels to try to incentivize businesses to take out loans for projects and to encourage consumers to make large purchases.
According to data from the Federal Reserve Bank of St. Louis, the average interest rate on 30-year fixed mortgages dropped to 3.13% on June 18th, the lowest rate since the institution started keeping track of the metric in 1971.
For those who have their plans set on a particular residence, now could be the ideal time to finalize a purchase. Aside from low-interest rates, another interesting development to focus on is the effect the pandemic has had on the supply and demand of houses, which in turn relates to the quantity and prices of houses in the US.
On the supply side, the market has yet to experience anything close to the shock that occurred during the housing crisis of 2008, when an abundance of deleveraging homeowners, hoping to salvage their financial situation during a period of plummeting real estate prices, put their properties on the market for sale.
Moreover, in terms of today’s housing market, the acting listing count of homes in the US has remained relatively stable between February and May, up ticking just 0.79% after falling to very low levels (citation). However, demand-wise it is harder to estimate the impact the pandemic has had on buyers thus far.
One particularly daunting statistic shows the sales of previously owned homes declining at the quickest monthly pace (17.8%) from March to April since 2010. However, such a drop in sales does not necessarily imply a permanently low demand from consumers.
Source: Federal Reserve of St.Louis
Rather, it is more likely the result of the nation-wide lockdowns and social distancing practiced by millions of Americans during the pandemic. Indeed, in spite of the fall in explicit home deals, prices of houses have continued to rise during the pandemic, a sign that many buyers have not left the market. This is unlike the previous recession when the value of real estate steeply fell sharply.
As states continue to reopen and people become more comfortable engaging with each other, sales should start to rise to their previous level.
Furthermore, as home sales and prices have yet to strongly deviate from previous measures thus far, it would be wise to consider how the current economic outlook could have an effect on the real estate market. Many economists have expected the ensuing economic recovery to take a “V-shaped” form, one in which, after a period of downturn, the economy quickly recovers and returns to previous growth levels.
Evidence that has thus far supported such an upswing includes a fall in the unemployment rate from 14.7% in April to 13.3% in May when many economists predicted the rate to continue to rise, as well as surprisingly strong retail sales during the month of April.
On the other hand, some analysts project that the economy will take the form of a “U-shaped” recovery, one that would be analogous to the last recovery, which was slow and steady and left many laid-off employees out of the job market for a sustainable time.
If consumers are hesitant to engage with strangers out of fear of contracting the coronavirus, the result could be a slow recovery for consumer spending, the most important component of the economy.
Several industries that involve close human contact, including air travel, hotel, and hospitality and service sectors, could continue to be badly impacted by the pandemic. Consequently, it may take a sustained period before the economy fully recovers.
This viewpoint is supported by the Fed, which announced its intent to keep interest rates low through 2022.
If the pessimistic view regarding the recovery holds true, the result could include a more sustained form of low demand for houses, especially for properties in areas deemed to be “hot-spots” for the virus. The possible de-acceleration of prices, in addition to low mortgage rates, could provide further motivation for eager home buyers to enter the market.
An additional, perhaps underlooked, characteristic of the financial world, especially among real estate participants, concerns the potential of a credit-market freeze.
Essentially, such a scenario typically occurs when creditors are reluctant to lend money to individuals and businesses out of fear the borrowers will be unable to pay back their debts. Given the recent surge of the virus in states such as Florida and Arizona, as well as beliefs that such states may have to implement additional lockdown restrictions, banks may be unwilling to lend credit to many firms and individuals in such states.
If a credit freeze were to occur, many eager homeowners who could qualify for a mortgage in ordinary times may find it difficult to successfully apply for a loan. The result could be a steady slowdown in the general rise of prices.
Regardless of what direction the economy will head towards, it is perhaps most important for all soon-to-be homeowners to take extreme care of fundamentals before purchasing a house. For example, the notion of having secured an emergency fund (savings that can cover three to six months of expenses, as recommended by many financial advisors), is especially important in case certain states revert to lockdown.
This is also true for workers whose income is volatile, such as those who work in commission-based jobs. One other financial facet that individuals, especially those on the higher income scale, could focus on pertains to saving a sizable down payment for a home. The higher the down payment someone puts forth towards a house, the lower their monthly payments on a mortgage.
If a possible concern is a loss of some, if not all, of an individual’s income for an indefinite period of time, it might be ideal to maximize an initial deposit.
For many young people who benefited from the past recovery, now could be the optimal time to make one of the most significant commitments of their lifetimes. As the coronavirus pandemic ravages the economy, one of the few upsides that have emerged is the buying prospects for homes.
Although everyone’s financial situation is different, for some there may never be a better time to find a new home than now.
